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Exhibit 19





1st

FRANKLIN

FINANCIAL

CORPORATION



QUARTERLY

REPORT TO INVESTORS

AS OF AND FOR THE

THREE MONTHS ENDED

MARCH 31, 2015





MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following narrative is Management’s discussion and analysis of the foremost factors that influenced 1st Franklin Financial Corporation’s and its consolidated subsidiaries’ (the “Company”, “our” or “we”) financial condition and operating results as of March 31, 2015, and for the three-month periods ended March 31, 2015 and 2014.  This analysis and the accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company’s 2014 Annual Report.  Results achieved in any interim period are not necessarily reflective of the results to be expected for any other interim or full year period.


Forward-Looking Statements:


Certain information in this discussion, and other statements contained in this Quarterly Report which are not statements of historical facts, may be forward-looking statements within the meaning of the federal securities laws.  Such forward-looking statements involve known and unknown risks and uncertainties.  The Company's actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein.  Possible factors which could cause actual future results to differ from expectations include, but are not limited to, adverse general economic conditions, including changes in the interest rate environment, unexpected reductions in the size of or collectability of our loan portfolio, reduced sales or increased redemptions of our securities, unavailability of borrowings under our credit facility, federal and state regulatory changes affecting consumer finance companies, increases in unemployment, unfavorable outcomes in legal proceedings and adverse or unforeseen developments in any of the matters described under “Risk Factors” in our 2014 Annual Report, as well as other factors referenced elsewhere in our filings with the Securities and Exchange Commission from time to time.  The Company undertakes no obligation to update any forward-looking statements, except as required by law.


The Company:


We are engaged in the consumer finance business, primarily in making consumer loans to individuals in relatively small amounts for short periods of time.  Other lending-related activities include the purchase of sales finance contracts from various dealers and the making of first and second mortgage real estate loans on real estate.  As of March 31, 2015, the Company’s business was operated through a network of 282 branch offices located in Alabama, Georgia, Louisiana, Mississippi, South Carolina and Tennessee.


We also offer optional credit insurance coverage to our customers when making a loan.  Such coverage may include credit life insurance, credit accident and health insurance, and/or credit property insurance.  Customers may request credit life insurance coverage to help assure that any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request accident and health insurance coverage to help continue loan payments if the customer becomes sick or disabled for an extended period of time.  Customers may also choose property insurance coverage to protect the value of loan collateral against damage, theft or destruction.  We write these various insurance policies as an agent for a non-affiliated insurance company.  Under various agreements, our wholly-owned insurance subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the insurance coverage on our customers written on behalf of this non-affiliated insurance company.


The Company's operations are subject to various state and federal laws and regulations.  We believe our operations are in compliance with applicable state and federal laws and regulations.



Financial Condition:


Total assets were $617.2 million at March 31, 2015 compared to $605.6 million at December 31, 2014, an increase of 2%.  The increase was attributed to increases in our cash and cash equivalents and an increase in other assets.   



1




Cash and cash equivalents increased $36.2 million (246%) at March 31, 2015 compared to December 31, 2014.  The increase was mainly due to funds generated from payments on loans and from growth in the sales of the Company's debt securities.  The Company typically experiences a seasonal decline in its net loan portfolio during the first quarter of each year as loan liquidations exceed loan originations.  This scenario creates positive liquidity which contributed to the aforementioned increase in our cash position.  During the first quarter of 2015, our net loan portfolio declined $25.0 million (6%) at March 31, 2015 compared to the prior year-end.  We project growth in our net loan portfolio as the year progresses.  Included in our net loan portfolio is our allowance for loan losses which reflects Management’s estimate of the level of allowance adequate to cover probable losses inherent in the loan portfolio as of the date of the statement of financial position.  To evaluate the overall adequacy of our allowance for loan losses, we consider the level of loan receivables, historical loss trends, loan delinquency trends, bankruptcy trends and overall economic conditions.  See Note 2, “Allowance for Loan Losses,” in the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for further discussion of the Company’s Allowance for Loan Losses.  Management believes the allowance for loan losses is adequate to cover probable losses inherent in the portfolio at March 31, 2015; however, unexpected changes in trends or deterioration in economic conditions could result in a change in the allowance.  Any increase could have a material adverse impact on our results of operations or financial condition in the future.


Increased sales of the Company's debt securities also contributed to the increase in cash and cash equivalents.  Funds provided from sales of debt securities during the quarter just ended added $11.4 million in to our cash and cash equivalents.


The Company maintains funds in restricted accounts at its insurance subsidiaries in order to comply with certain requirements imposed on insurance companies by the State of Georgia and to meet the reserve requirements of its reinsurance agreements.  Restricted cash also includes escrow deposits held by the Company on behalf of certain mortgage real estate customers.  At March 31, 2015, restricted cash increased $1.2 million (115%) compared to December 31, 2014.


Our investment portfolio declined $3.4 million (2%) at March 31, 2015 compared to the prior year end.  Redemptions due to calls and scheduled maturities on bonds led to the decrease.  The Company's investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds and various municipal bonds.  A portion of these investment securities have been designated as “available for sale” (87% as of March 31, 2015 and 85% as of December 31, 2014) with any unrealized gain or loss, net of deferred income taxes, accounted for as other comprehensive income in the Company’s Condensed Consolidated Statements of Comprehensive Income.  The remainder of the Company’s investment portfolio represents securities carried at amortized cost and designated as “held to maturity,” as Management does not intend to sell, and does not believe that it is more likely than not that it would be required to sell, such securities before recovery of the amortized cost basis.  Management believes the Company has adequate funding available to meet liquidity needs.


The Company also has a separate investment portfolio, captioned "Equity Fund Investments".  Total value of the fund at March 31, 2015 was $26.2 million compared to $26.1 million at December 31, 2014.  Earnings on the portfolio resulted in the increase.  The Company uses the equity method of accounting to account for this investment.


Other assets increased $2.5 million (12%) as of March 31, 2015 compared to December 31, 2014 mainly due to an increase in accounts receivable due in conjunction with credit insurance products sold by the Company.  As previously mentioned, the Company offers credit insurance products to our loan customers as an agent for a nonaffiliated insurance company.  


Accrued expenses and other liabilities declined $7.4 million (31%) at March 31, 2015 compared to December 31, 2014 mainly due to payment of 2014 incentive bonuses in February 2015.  Also contributing to the decrease was lower accrued salary expenses at March 31, 2015.




2



Results of Operations:


Total revenue during the first quarter of 2015 grew $1.7 million (4%) to $51.1 million compared to $49.4 million during the first quarter of 2014.  Higher interest and finance charge income earned on our loan and investment portfolios was the primary factor responsible for the increase in revenues.  Although revenues were higher, expenses increased at a higher rate resulting in a decrease in net income.  Net income during the same comparable periods was $8.6 million and $10.8 million, respectively, representing a 21% decrease.


Net Interest Income


Net interest income represents the difference between income on earning assets (loans and investments) and the cost of funds on interest bearing liabilities.  Our net interest income is affected by the size and mix of our loan and investment portfolios as well as the spread between interest and finance charges earned on the respective assets and interest incurred on our debt.  Our net interest income increased $1.9 million (6%) during the three-month period ended March 31, 2015 compared to the same period in 2014.  A higher level of average net receivables led to an increase in interest and finance charges earned of $2.1 million (6%) during the three-month period ended March 31, 2015 compared to the same period in 2014.

 

Although average daily borrowings increased $22.9 million during the three-month period ended March 31, 2015 compared to the same period in 2014, the low interest rate environment resulted in only a minimal increase in interest expense during the comparable periods.  The Company's average borrowing rate decreased to 3.23% during the three-month period just ended compared to 3.24% during the same period a year ago.  


Management projects that, based on historical results, average net receivables will grow during the remainder of the year, and earnings are expected to increase accordingly.  However, a decrease in net receivables or an increase in interest rates on outstanding borrowings could negatively impact our net interest margin.  


Insurance Income

 

Net insurance income decreased $.1 million (2%) during the three-month period ended March 31, 2015 compared to the prior year period.  Premiums and commissions increased; however, the increase was lower than in prior years due to combination of two factors: (i) a decrease in number of customers opting for credit insurance and (ii) higher volume on loan products that do not include an option for insurance.  Higher insurance claims and expenses offset the increase in premiums and commissions, resulting in the decline in net insurance income.

 

Provision for Loan Losses


The Company’s provision for loan losses is a charge against earnings to maintain the allowance for loan losses at a level that Management estimates is adequate to cover probable losses inherent as of the date of the statement of financial position.  


Our provision for loan losses increased $.3 million (6%) during the three-month period ended March 31, 2015 compared to the same period in 2014.  The increase was due to a higher level of  net charge offs.


Determining a proper allowance for loan losses is a critical accounting estimate which involves Management’s judgment with respect to certain relevant factors, such as historical and expected loss trends, unemployment rates in various locales, current and expected net charge offs, delinquency levels, bankruptcy trends and overall general and industry specific economic conditions.


Management continues to monitor unemployment rates, which have decreased slightly in recent periods, but remain higher than historical averages in the states in which we operate.  Volatility in gasoline prices is also being monitored.  These factors tend to adversely impact our customers which, in turn, could have an adverse impact on our allowance for loan losses. Based on present and expected overall economic conditions, however, Management believes the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio as of March



3



31, 2015.  However, continued higher than historical average levels of unemployment and/or volatile market conditions could cause actual losses to vary materially from our estimated amounts.  Management may determine it is appropriate to increase the allowance for loan losses in future periods, or actual losses could exceed allowances in any period, either of which events could have a material negative impact on our results of operations in the future.


Other Operating Expenses


The  Company's other operating expenses increased $3.0 million (11%) during the three-month period ended March 31, 2015 compared to the same period a year ago.  Other operating expenses encompasses personnel expense, occupancy expense and miscellaneous other expenses.


Personnel expense increased $1.4 million (8%) during the three-month period ended March 31, 2015 compared to the same period in 2014.  The increases were primarily due to an increase in the number employees, annual merit salary increases, increases in the Company's incentive bonus accrual, increases in employee benefit expenses, increases in contributions to the Company's 401(k) plan and increased payroll taxes.


Higher maintenance expense, depreciation expense and increased rent expense caused occupancy expense to increase $0.2 million (6%) during the three-month period just ended compared to the same period a year ago.


During the three-month period ended March 31, 2015, miscellaneous other operating expenses increased $1.5 million (22%) compared to the same period in 2014.  The increases were mainly the result of increases in advertising expenses, increases in charitable contributions, increases in consultant fees, increases in computer expenses, increases in legal and audit expenses, increases in postage expense, increases in travel expenses and increases in taxes and license expenses.  

 

Income Taxes


The Company has elected to be, and is, treated as an S corporation for income tax reporting purposes.  Taxable income or loss of an S corporation is passed through to, and included in the individual tax returns of, the shareholders of the Company, rather then being taxed at the corporate level.  Notwithstanding this election, however, income taxes continue to be reported for, and paid by, the Company's insurance subsidiaries as they are not allowed to be treated as S corporations, and for the Company’s state taxes in Louisiana, which does not recognize S corporation status.  Deferred income tax assets and liabilities are recognized and provisions for current and deferred income taxes continue to be recorded by the Company’s subsidiaries.  The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences.  


Effective income tax rates were approximately 12% and 10%, respectively, during the three-month periods ended March 31, 2015 and 2014.  The Company’s effective tax rates during the reporting periods were lower than statutory rates due to income at the S corporation level being passed to the shareholders of the Company for tax reporting purposes, whereas income earned at the insurance subsidiary level was taxed at the corporate level.  The tax rates of the Company’s insurance subsidiaries are below statutory rates primarily due to investments in tax exempt bonds held by the Company’s insurance subsidiaries.  


Quantitative and Qualitative Disclosures About Market Risk:


Interest rates continued to be near historical low levels during the reporting period.  We currently expect only minimal fluctuations in market interest rates during the remainder of the year, thereby minimizing the expected impact on our net interest margin; however, no assurances can be given in this regard.  Please refer to the market risk analysis discussion contained in our 2014 Annual Report on Form 10-K as of and for the year ended December 31, 2014 for a more detailed analysis of our market risk exposure.  There were no material changes in our risk exposures in the three months ended March 31, 2015 as compared to those at December 31, 2014.




4



Liquidity and Capital Resources:


As of March 31, 2015 and December 31, 2014, the Company had $50.9 million and $14.7 million, respectively, invested in cash and cash equivalents, the majority of which was held by the parent company.  

  

The Company’s investments in marketable securities can be readily converted into cash, if necessary.  State insurance regulations limit the use an insurance company can make of its assets.  Dividend payments to a parent company by its wholly-owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of policyholders’ surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiary.  At December 31, 2014, Frandisco Property and Casualty Insurance Company (“Frandisco P&C”) and Frandisco Life Insurance Company (“Frandisco Life”), the Company’s wholly-owned insurance subsidiaries, had policyholders’ surpluses of $62.5 million and $62.3 million, respectively.  The maximum aggregate amount of dividends these subsidiaries can pay to the Company in 2015, without prior approval of the Georgia Insurance Commissioner, is approximately $11.6 million.  No dividends were paid during the three-month period ended March 31, 2015.


The majority of the Company’s liquidity requirements are financed through the collection of receivables and through the sale of short- and long-term debt securities.  The Company’s continued liquidity is therefore dependent on the collection of its receivables and the sale of debt securities that meet the investment requirements of the public.  In addition to its receivables and securities sales, the Company has an external source of funds available under a credit facility with Wells Fargo Preferred Capital, Inc. (the “credit agreement”).  The credit agreement, as amended, provides for borrowings of up to $100.0 million or 70% of the Company's net finance receivables (as defined in the Credit Agreement), whichever is less and has a maturity date of September 11, 2017.  Available borrowings under the credit agreement were $100.0 million at March 31, 2015 and December 31, 2014, at an interest rate of 3.75%.  The credit agreement contains covenants customary for financing transactions of this type.  At March 31, 2015, the Company was in compliance with all covenants.  Management believes this credit facility, when considered with the Company’s other expected sources of funds, should provide sufficient liquidity for the continued growth of the Company for the foreseeable future.


Critical Accounting Policies:


The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the financial services industry. The Company’s critical accounting and reporting policies include the allowance for loan losses, revenue recognition and insurance claims reserves.  During the three months ended March 31, 2015, there were no material changes to the critical accounting policies or related estimates disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.


Allowance for Loan Losses


Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover probable credit losses inherent in our loan portfolio.  


The allowance for loan losses is established based on the determination of the amount of probable losses inherent in the loan portfolio as of the reporting date.  We review, among other things, historical charge off experience factors, delinquency reports, historical collection rates, economic trends such as unemployment rates, gasoline prices and bankruptcy filings and other information in order to make what we believe are the necessary judgments as to probable losses.  Assumptions regarding probable losses are reviewed periodically and may be impacted by our actual loss experience and changes in any of the factors discussed above.





5



Revenue Recognition


Accounting principles generally accepted in the United States require that an interest yield method be used to calculate the income recognized on accounts which have precomputed charges.  An interest yield method is used by the Company on each individual account with precomputed charges to calculate income for those active accounts; however, state regulations often allow interest refunds to be made according to the Rule of 78’s method for payoffs and renewals.  Since the majority of the Company's accounts with precomputed charges are paid off or renewed prior to maturity, the result is that most of those accounts effectively yield on a Rule of 78's basis.


Precomputed finance charges are included in the gross amount of certain direct cash loans, sales finance contracts and certain real estate loans.  These precomputed charges are deferred and recognized as income on an accrual basis using the effective interest method.  Some other cash loans and real estate loans, which do not have precomputed charges, have income recognized on a simple interest accrual basis.  Income is not accrued on any loan that is more than 60 days past due.


Loan fees and origination costs are deferred and recognized as adjustments to the loan yield over the contractual life of the related loan.  


The property and casualty credit insurance policies written by the Company, as agent for a non-affiliated insurance company, are reinsured by the Company’s property and casualty insurance subsidiary.  The premiums on these policies are deferred and earned over the period of insurance coverage using the pro-rata method or the effective yield method, depending on whether the amount of insurance coverage generally remains level or declines.


The credit life and accident and health insurance policies written by the Company, as agent for a non-affiliated insurance company, are reinsured by the Company’s life insurance subsidiary.  The premiums are deferred and earned using the pro-rata method for level-term life insurance policies and the effective yield method for decreasing-term life policies.  Premiums on accident and health insurance policies are earned based on an average of the pro-rata method and the effective yield method.


Insurance Claims Reserves


Included in unearned insurance premiums and commissions on the Unaudited Condensed Consolidated Statements of Financial Position are reserves for incurred but unpaid credit insurance claims for policies written by the Company and reinsured by the Company’s wholly-owned insurance subsidiaries.  These reserves are established based on generally accepted actuarial methods.  In the event that the Company’s actual reported losses for any given period are materially in excess of the previously estimated amounts, such losses could have a material adverse effect on the Company’s results of operations.


Different assumptions in the application of any of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations.


Recent Accounting Pronouncements:


See “Recent Accounting Pronouncements” in Note 1 to the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of any applicable recently adopted accounting standards and the expected impact of accounting standards recently issued but not yet required to be adopted.  For pronouncements already adopted, any material impacts on the Company’s consolidated financial statements are discussed in the applicable section(s) of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



6




1st FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

 

March 31,

December 31,

 

2015

2014

ASSETS

 

 

 

CASH AND CASH EQUIVALENTS

$

50,925,977 

$

14,726,542

 

 

 

RESTRICTED CASH

2,310,245 

1,073,157

 

 

 

LOANS:

Direct Cash Loans

Real Estate Loans

Sales Finance Contracts



Less:

Unearned Finance Charges

Unearned Insurance Premiums and Commissions

  

Allowance for Loan Losses

Net Loans


436,699,768 

20,217,705 

24,115,215 

481,032,688 


55,851,454 

33,236,636 

28,620,000 

363,324,598 


471,195,331

20,271,000

23,906,111

515,372,442


63,079,794

35,331,723

28,620,000

388,340,925

 

 

 

INVESTMENT SECURITIES:

Available for Sale, at fair value

Held to Maturity, at amortized cost


131,885,057 

20,328,270 

152,213,327 


132,847,073

22,762,252

155,609,325

 

 

 

EQUITY METHOD INVESTMENTS

26,185,825 

26,059,579

 

 

 

OTHER ASSETS

22,246,590 

19,778,517

 

 

 

TOTAL ASSETS

$

617,206,562 

$

605,588,045

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

SENIOR DEBT

$346,991,060 

$

335,186,200

ACCRUED EXPENSES AND OTHER LIABILITIES

16,803,235 

24,228,121

SUBORDINATED DEBT

37,348,028 

37,726,538

Total Liabilities

401,142,323 

397,140,859

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 6)


STOCKHOLDERS' EQUITY:

 

 

Preferred Stock: $100 par value, 6,000 shares

authorized;  no shares outstanding


--


--

Common Stock

Voting Shares; $100 par value; 2,000 shares

authorized; 1,700 shares outstanding

Non-Voting Shares; no par value; 198,000 shares

authorized; 168,300 shares outstanding



170,000 


-- 



170,000


--

Accumulated Other Comprehensive Income

3,501,540 

3,663,475

Retained Earnings

212,392,699 

204,613,711

Total Stockholders' Equity

216,064,239 

208,447,186

 

 

 

TOTAL LIABILITIES AND

STOCKHOLDERS' EQUITY


$

617,206,562 


$

605,588,045

 

See Notes to Unaudited Condensed Consolidated Financial Statements



7




1st FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

INCOME AND RETAINED EARNINGS

(Unaudited)

 

 

 

 

Three Months Ended

 

March 31,

 

2015

2014

 

 

 

INTEREST INCOME

$

38,023,452

$

35,929,184

INTEREST EXPENSE

3,069,077

2,889,252

NET INTEREST INCOME

34,954,375

33,039,932

 

 

 

Provision for Loan Losses

6,222,076

5,894,232

 

 

 

NET INTEREST INCOME AFTER

 

 

PROVISION FOR LOAN LOSSES

28,732,299

27,145,700

 

 

 

NET INSURANCE INCOME:

 

 

Premiums

12,173,044

11,863,199

Insurance Claims and Expenses

2,607,844

2,149,027

 

9,565,200

9,714,172

 

 

 

OTHER REVENUE

943,548

1,593,291

 

 

 

OTHER OPERATING EXPENSES:

 

 

Personnel Expense

18,004,338

16,619,454

Occupancy Expense

3,438,364

3,244,937

Other

8,128,765

6,663,689

Total

29,571,467

26,528,080

 

 

 

INCOME BEFORE INCOME TAXES

9,669,580

11,925,083

 

 

 

Provision for Income Taxes

1,113,590

1,140,471

 

 

 

NET INCOME

8,555,990

10,784,612

 

 

 

RETAINED EARNINGS, Beginning of Period

204,613,711

194,655,367

Distributions on Common Stock

777,002

4,620,000

RETAINED EARNINGS, End of Period

$

212,392,699

$

200,819,979

 

 

 

BASIC EARNINGS PER SHARE:

 

 

170,000 Shares Outstanding for all

 

 

Periods (1,700 voting, 168,300 non-voting)

$50.33

$63.44

 



See Notes to Unaudited Condensed Consolidated Financial Statements




8



1st FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


 

Three Months Ended

 

March 31, 2015

March 31, 2014

 

 

 

Net Income

$

8,555,990

$

10,784,612

 

 

 

Other Comprehensive Income (Loss):

 

 

Net changes related to available-for-sale

 

 

  securities:

 

 

Unrealized gains (losses)

(149,420)

3,234,442

Income tax benefit (expense)

(12,515)

(875,152)

Net unrealized gains (losses)

(161,935)

2,359,290

 

 

 

Less reclassification of gain to

 

 

  net income (1)

-

7

 

 

 

Total Other Comprehensive

 

 

Income (Loss)

(161,935)

2,359,283

 

 

 

Total Comprehensive Income

$

8,394,055

$

13,143,895



(1)

No amounts were reclassified on the Condensed Consolidated Statements of Income and

Retained Earnings (unaudited) for the three months ended March 31, 2015.


Reclassified $9 to other operating expenses and $2 to provision for income taxes on the Condensed Consolidated Statements of Income and Retained Earnings (unaudited) for the three months ended March 31, 2014.






See Notes to Unaudited Condensed Consolidated Financial Statements



9




1ST FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

Three Months Ended

 

March 31,

 

2015

2014

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

Net Income

 $ 8,555,990 

 $ 10,784,612 

Adjustments to reconcile net income to net cash

provided by operating activities:

Provision for loan losses

Depreciation and amortization

Provision for deferred income taxes

Earnings in equity method investment

Other

(Increase) decrease in miscellaneous other assets

Decrease in other liabilities

Net Cash Provided



  6,222,076 

  845,671 

  (170,082)

(126,246)

  304,019 

  (2,305,599)

  (7,267,319)

  6,058,510 



  5,894,232 

  744,421 

  (98,342)

(287,465)

  278,425 

  2,192,964 

  (6,515,287)

  12,993,560 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

Loans originated or purchased

Loan payments

Increase in restricted cash

Purchases of marketable debt securities

Redemptions of marketable debt securities

Fixed asset additions, net

Net Cash Provided

  (72,171,909)  90,966,160 

  (1,237,088)

  (1,453,499) 4,395,000 

  (1,007,087)

  19,491,577 

  (65,353,269)  82,874,628 

  (611,629)

  (6,968,202) 5,235,000 

  (499,058)

  14,677,470 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

Net increase in senior demand notes

Advances on credit line

Payments on credit line

Commercial paper issued

Commercial paper redeemed

Subordinated debt securities issued

Subordinated debt securities redeemed

Dividends / Distributions

Net Cash Provided

  1,668,146    

  131,028 

  (131,028)

  15,990,094   (5,853,380)

  2,371,190 

  (2,749,700)

  (777,002)

  10,649,348 

  4,081,095    

  131,016 

  (131,016)

  12,680,956   (6,887,193)

  2,134,671 

  (2,576,936)

  (4,620,000)

  4,812,593 

 

 

 

NET INCREASE CASH AND CASH EQUIVALENTS

  36,199,435 

  32,483,623 

 

 

 

CASH AND CASH EQUIVALENTS, beginning

  14,726,542 

  26,399,839 

 

 

 

CASH AND CASH EQUIVALENTS, ending

 $ 50,925,977 

 $ 58,883,462 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest

Income Taxes

 $ 2,961,192 

  20,000 

 $ 2,889,769 

  100,000 

 

 

 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements



10



-NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-


Note 1 – Basis of Presentation


The accompanying unaudited condensed consolidated financial statements of 1st Franklin Financial Corporation and subsidiaries (the "Company") should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto as of December 31, 2014 and for the year then ended included in the Company's 2014 Annual Report filed with the Securities and Exchange Commission.


In the opinion of Management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position as of March 31, 2015 and December 31, 2014, its consolidated results of operations, comprehensive income and cash flows for the three-month periods ended March 31, 2015 and 2014. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, the Company believes that the disclosures herein are adequate to make the information presented not misleading.


The Company’s financial condition and results of operations as of and for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year or any other future period.  The preparation of financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amount of assets and liabilities at and as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from those estimates.


The computation of earnings per share is self-evident from the accompanying Condensed Consolidated Statements of Income and Retained Earnings (Unaudited).  The Company has no dilutive securities outstanding.


Recent Accounting Pronouncements:


There were no recently released accounting pronouncements that Management believes would have a material impact on the Company.


Note 2 – Allowance for Loan Losses


The allowance for loan losses is based on Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio.  Management’s approach to estimating and evaluating the allowance for loan losses is on a total portfolio level based on historical loss trends, bankruptcy trends, the level of receivables at the balance sheet date, payment patterns and economic conditions primarily including, but not limited to, unemployment levels and gasoline prices.  Historical loss trends are tracked on an on going basis.  The trend analysis includes statistical analysis of the correlation between loan date and charge off date, charge off statistics by the total loan portfolio, and charge off statistics by branch, division and state.  Delinquency and bankruptcy filing trends are also tracked.  If trends indicate an adjustment to the allowance for loan losses is warranted, Management will make what it considers to be appropriate adjustments.  The level of receivables at the balance sheet date is reviewed and adjustments to the allowance for loan losses are made if Management determines increases or decreases in the level of receivables warrants an adjustment.  The Company uses monthly unemployment statistics, and various other monthly or periodic economic statistics, published by departments of the U.S. government and other economic statistics providers to determine the economic component of the allowance for loan losses.  Such allowance is, in the opinion of Management, sufficiently adequate for probable losses in the current loan portfolio.  As the estimates used in determining the loan loss reserve are influenced by outside factors, such as



11



consumer payment patterns and general economic conditions, there is uncertainty inherent in these estimates.  Actual results could vary based on future changes in significant assumptions.


Management does not disaggregate the Company’s loan portfolio by loan class when evaluating loan performance.  The total portfolio is evaluated for credit losses based on contractual delinquency and other economic conditions. The Company classifies delinquent accounts at the end of each month according to the number of installments past due at that time, based on the then-existing terms of the contract.  Accounts are classified in delinquency categories based on the number of days past due.  When three installments are past due, we classify the account as being 60-89 days past due; when four or more installments are past due, we classify the account as being 90 days or more past due.  When a loan becomes five installments past due, it is charged off unless Management directs that it be retained as an active loan. In making this charge off evaluation, Management considers factors such as pending insurance, bankruptcy status and other indicators of collectability. In addition, no installment is counted as being past due if at least 80% of the contractual payment has been paid. In connection with any bankruptcy court-initiated repayment plan and as allowed by state regulatory authorities, the Company effectively resets the delinquency rating of each account to coincide with the court initiated repayment plan. The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums, if applicable.


When a loan becomes 60 days or more past due based on its original terms, it is placed in nonaccrual status.  At such time, the accrual of any additional finance charges is discontinued.  Finance charges are then only recognized to the extent there is a loan payment received or when the account qualifies for return to accrual status.  Nonaccrual loans return to accrual status when the loan becomes less than 60 days past due.  There were no loans past due 60 days or more and still accruing interest at March 31, 2015 or December 31, 2014.  The Company’s principal balances on non-accrual loans by loan class as of March 31, 2015 and December 31, 2014 are as follows:


Loan Class

March 31,

 2015

December 31, 2014

 

 

 

Consumer Loans

$

20,042,965

$

23,124,540

Real Estate Loans

895,745

919,600

Sales Finance Contracts

648,328

739,009

Total

$

21,587,039

$

24,783,149


An age analysis of principal balances on past due loans, segregated by loan class, as of March 31, 2015 and December 31, 2014 follows:




March 31, 2015


30-59 Days

Past Due


60-89 Days

Past Due

90 Days or

More

Past Due

Total

Past Due

Loans

 

 

 

 

 

Consumer Loans

$

12,562,051

$

6,174,175

$

13,173,174

$

31,909,400

Real Estate Loans

355,269

249,442

532,214

1,136,925

Sales Finance Contracts

381,220

173,737

444,044

999,001

Total

$

13,298,540

$

6,597,354

$

14,149,432

$

34,045,326





December 31, 2014


30-59 Days

Past Due


60-89 Days

Past Due

90 Days or

More

Past Due

Total

Past Due

Loans

 

 

 

 

 

Consumer Loans

$

11,919,463

$

7,217,788

$

14,282,710

$

33,419,961

Real Estate Loans

441,721

180,756

504,384

1,126,861

Sales Finance Contracts

374,821

209,845

463,957

1,048,623

Total

$

12,736,005

$

7,608,389

$

15,251,051

$

35,595,445


In addition to the delinquency rating analysis, the ratio of bankrupt accounts to the total loan portfolio is also used as a credit quality indicator.  The ratio of bankrupt accounts outstanding to total principal loan balances outstanding at March 31, 2015 and December 31, 2014 was 2.81% and 2.48%, respectively.






12



Nearly our entire loan portfolio consists of small homogeneous consumer loans (of the product types set forth in the table below).  



March 31, 2015


Principal

Balance


%

Portfolio

3 Months

Net

Charge Offs

%

Net

Charge Offs

 

 

 

 

 

Consumer Loans

$

434,968,175

90.9%

$

6,106,817

98.2

Real Estate Loans

19,848,975

4.1   

(3,787)

(.1)  

Sales Finance Contracts

23,913,586

5.0   

119,046

1.9  

Total

$

478,730,736

100.0%

$

6,222,076

100.0%





March 31, 2014


Principal

Balance


%

Portfolio

3 Months

Net

Charge Offs

%

Net

Charge Offs

 

 

 

 

 

Consumer Loans

$

410,972,676

90.8%

$

5,713,824

96.9

Real Estate Loans

19,619,407

4.4   

(1,222)

-  

Sales Finance Contracts

21,863,183

4.8   

181,630

3.1  

Total

$

452,455,266

100.0%

$

5,894,232

100.0%


Sales finance contracts are similar to consumer loans in nature of loan product, terms, customer base to whom these products are marketed, factors contributing to risk of loss and historical payment performance, and together with consumer loans, represented approximately 96% of the Company’s loan portfolio at March 31, 2015 and 2014.  As a result of these similarities, which have resulted in similar historical performance, consumer loans and sales finance contracts represent substantially all loan losses.  Real estate loans and related losses have historically been insignificant, and, as a result, we do not stratify the loan portfolio for purposes of determining and evaluating our loan loss allowance.  Due to the composition of the loan portfolio, the Company determines and monitors the allowance for loan losses on a collectively evaluated, single portfolio segment basis.  Therefore, a roll forward of the allowance for loan loss activity at the portfolio segment level is the same as at the total portfolio level.  We have not acquired any impaired loans with deteriorating quality during any period reported.  The following table provides additional information on our allowance for loan losses based on a collective evaluation:

 

 

Three Months Ended

 

Mar. 31, 2015

Mar. 31, 2014

Allowance for Credit Losses:

 

 

Beginning Balance

$

28,620,000 

$

24,680,789 

Provision for Loan Losses

6,222,076 

5,894,232 

Charge-offs

(8,859,721)

(8,443,132)

Recoveries

2,637,645 

2,548,900 

Ending Balance

$

28,620,000 

$

24,680,789 

 

 

 

Ending Balance; collectively

evaluated for impairment


$

28,620,000 


$

24,680,789 


Finance receivables:

 

 

Ending Balance

$

478,730,736 

$452,455,266 

Ending Balance; collectively

evaluated for impairment


$

478,730,736 


$

452,455,266 




13



Troubled Debt Restructings ("TDR's") represent loans on which the original terms of the loans have been modified as a result of the following conditions: (i) the restructuring constitutes a concession and (ii) the borrower is experiencing financial difficulties. Loan modifications by the Company involve payment alterations, interest rate concessions and/ or reductions in the amount owed by the borrower.  The following table presents a summary of loans that were restructured during the three months ended March 31, 2015.




Number

Of

Loans

Pre-Modification

Recorded

Investment

Post-Modification

Recorded

Investment

 

 

 

 

Consumer Loans

1,110

$

2,968,080

$

2,823,413

Real Estate Loans

13

108,315

108,265

Sales Finance Contracts

50

96,552

93,636

Total

1,173

$

3,172,947

$

3,025,314



The following table presents a summary of loans that were restructured during the three months ended March 31, 2014.

 

Number

Of

Loans

Pre-Modification

Recorded

Investment

Post-Modification

Recorded

Investment

 

 

 

 

Consumer Loans

879

$

2,776,850

$

2,590,986

Real Estate Loans

15

113,052

113,052

Sales Finance Contracts

43

108,299

104,674

Total

937

$

2,998,201

$

2,808,712



TDR's that occurred during the previous twelve months and subsequently defaulted during the three months ended March 31, 2015 are listed below.  


 

Number

Of

Loans

Pre-Modification

Recorded

Investment

 

 

 

Consumer Loans

193

$

333,099

Real Estate Loans

1

1,000

Sales Finance Contracts

7

6,883

Total

201

$

340,982



TDR's that occurred during the twelve months ended March 31, 2014 and subsequently defaulted during the three months ended March 31, 2014 are listed below.


 

Number

Of

Loans

Pre-Modification

Recorded

Investment

 

 

 

Consumer Loans

184

$

360,106

Real Estate Loans

-

-

Sales Finance Contracts

7

8,538

Total

191

$

368,644



The level of TDR's, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance of loan losses.



14



Note 3 – Investment Securities


Debt securities available-for-sale are carried at estimated fair value. Debt securities designated as "Held to Maturity" are carried at amortized cost based on Management's intent and ability to hold such securities to maturity.  The amortized cost and estimated fair values of these debt securities were as follows:


 

 

As of

March 31, 2015

As of

December 31, 2014

 

 


Amortized

Cost

Estimated

Fair

Value


Amortized

Cost

Estimated

Fair

Value

 

Available-for-Sale:

Obligations of states and

political subdivisions

Corporate securities



$

127,088,406

130,316

$

127,218,722



$

131,511,722

373,335

$

131,885,057



$

127,901,002

130,316

$

128,031,318



$

132,428,086

418,987

$

132,847,073


Held to Maturity:

Obligations of states and

political subdivisions



$

20,328,270



$

20,704,837



$

22,762,252



$

23,129,621


Gross unrealized losses on investment securities totaled $415,870 and $480,517 at March 31, 2015 and December 31, 2014, respectively.  The following table provides an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of March 31, 2015 and December 31, 2014:



 

Less than 12 Months

12 Months or Longer

Total

March 31, 2015

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Available for Sale:

 

 

 

 

 

 

Obligations of states and

political subdivisions


$ 16,336,899 


$  (217,639)


$ 4,096,282 


$ (131,002)


$ 20,433,181 


$ (348,641)

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

Obligations of states and

political subdivisions


 1,978,829 


    (37,506)


   500,000 


 (29,723)


 2,478,829 


 (67,229)

 

 

 

 

 

 

 

Total

$

18,315,728 

$ (255,145)

$ 4,596,282 

$ (160,725)

$22,912,010 

$ (415,870)



 

Less than 12 Months

12 Months or Longer

Total

December 31, 2014

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Available for Sale:

 

 

 

 

 

 

Obligations of states and

political subdivisions


$ 6,047,595 


$ (115,227) 


$ 12,257,317 


$(242,701) 

 

$18,304,912 


$ (357,928) 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

Obligations of states and

political subdivisions


 1,970,828 


 (45,586) 


 1,387,733 


   (77,003) 


     3,358,561 


 (122,589) 

 

 

 

 

 

 

 

Total

$

8,018,423 

$ (160,813) 

$ 13,645,050 

$ (319,704) 

$21,663,473 

$ (480,517) 


The previous two tables represent 33 and 32 investments held by the Company at March 31, 2015 and December 31, 2014, respectively, the majority of which are rated “A” or higher by Standard & Poor’s.  The unrealized losses on the Company’s investments listed in the above tables were primarily the result of interest rate and market fluctuations.  Based on the credit ratings of these investments, along with the consideration of whether the Company has the intent to sell or will be more likely than not required to sell the applicable investment before recovery of amortized cost basis, the Company does not consider the impairment of any of these investments to be other-than-temporary at March 31, 2015 or December 31, 2014, respectively.


The Company’s insurance subsidiaries internally designate certain investments as restricted to cover their policy reserves and loss reserves.  Funds are held in separate trusts for the benefit of each insurance subsidiary at U.S. Bank National Association ("US Bank").  US Bank serves as trustee under a trust agreement with the Company's property and casualty insurance company subsidiary ("Frandisco P&C"), as grantor, and American Bankers Insurance Company of Florida as the beneficiary.  At March 31, 2015, this trust held $23.3 million in available-for-



15



sale investment securities at market value and $7.8 million in held-to-maturity investment securities at amortized cost.  US Bank also serves as trustee under a trust agreement with the Company's life insurance subsidiary (“Frandisco Life”) as grantor and American Bankers Life Assurance Company as beneficiary.  At March 31, 2015, the trust for Frandisco Life held $3.0 million in available-for-sale investment securities at market value and $1.0 million in held-to-maturity investment securities at amortized cost.  The amounts required to be held in each trust change as required reserves change.  All earnings on assets in the trusts are remitted to Frandisco P&C and Frandisco Life, respectively.  Any charges associated with the trust are paid by the beneficiaries of each trust.


Note 4 – Fair Value


Under ASC No. 820, fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The following fair value hierarchy is used in selecting inputs used to determine the fair value of an asset or liability, with the highest priority given to Level 1, as these are the most transparent or reliable.  A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurements.


Level 1 - Quoted prices for identical instruments in active markets.


Level 2 - Quoted prices for similar instruments in active markets; quoted prices for

identical or similar instruments in markets that are not active; and model-derived   valuations in which all significant inputs are observable in active markets.


Level 3 - Valuations derived from valuation techniques in which one or more significant

inputs are unobservable.


The following methods and assumptions are used by the Company in estimating fair values of its financial instruments:


Cash and Cash Equivalents:  Cash includes cash on hand and with banks.  Cash equivalents are short-term highly liquid investments with original maturities of three months or less.   The carrying value of cash and cash equivalents approximates fair value due to the relatively short period of time between origination of the instruments and their expected realization.  The estimated fair value of cash and cash equivalents is classified as a Level 1 financial asset.


Loans:  The carrying value of the Company’s direct cash loans and sales finance contracts approximates the fair value since the estimated life, assuming prepayments, is short-term in nature.  The fair value of the Company’s real estate loans approximates the carrying value since the interest rate charged by the Company approximates market rate.  The estimated fair value of loans is classified as a Level 3 financial asset.


Marketable Debt Securities:  The Company values Level 2 securities using various observable market inputs obtained from a pricing service. The pricing service prepares evaluations of fair value for our Level 2 securities using proprietary valuation models based on techniques such as multi-dimensional relational models, and series of matrices that use observable market inputs. The fair value measurements and disclosures guidance defines observable market inputs as the assumptions market participants would use in pricing the asset developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The Company uses the following observable market inputs (“standard inputs”), listed in the approximate order of priority, in the pricing evaluation of Level 2 securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research data.  State, municipalities and political subdivisions securities are priced by our pricing service using material event



16



notices and new issue data inputs in addition to the standard inputs.  See additional information, including the table below, regarding fair value under ASC No. 820, and the  fair value measurement of available-for-sale marketable debt securities.


Equity Method Investment:  The fair value of equity method investment is estimated based on the Company's allocable share of the investee net asset value as of the reporting date.  


Senior Debt Securities:  The carrying value of the Company’s senior debt securities approximates fair value due to the relatively short period of time between the origination of the instruments and their expected repayment.  The estimate of fair value of senior debt securities is classified as a Level 2 financial liability.


Subordinated Debt Securities:  The carrying value of the Company’s variable rate subordinated debt securities approximates fair value due to the re-pricing frequency of the securities.  The estimate of fair value of subordinated debt securities is classified as a Level 2 financial liability.



The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value.  The Company performs due diligence to understand the inputs and how the data was calculated or derived.  The Company employs a market approach in the valuation of its obligations of states, political subdivisions and municipal revenue bonds that are available-for-sale.  These investments are valued on the basis of current market quotations provided by independent pricing services selected by Management based on the advice of an investment manager.  To determine the value of a particular investment, these independent pricing services may use certain information with respect to market transactions in such investment or comparable investments, various relationships observed in the market between investments, quotations from dealers, and pricing metrics and calculated yield measures based on valuation methodologies commonly employed in the market for such investments. Quoted prices are subject to internal price verification procedures.  We validate prices received using a variety of methods including, but not limited, to comparison to other pricing services or corroboration of pricing by reference to independent market data such as a secondary broker.  There was no change in this methodology during any period reported.


Assets measured at fair value as of March 31, 2015 and December 31, 2014 were available-for-sale investment securities which are summarized below:



 

 

Fair Value Measurements at Reporting Date Using

 

 

Quoted Prices

 

 

 

 

In Active

Significant

 

 

 

Markets for

Other

Significant

 

 

Identical

Observable

Unobservable

 

March 31,

Assets

Inputs

Inputs

Description

2015

(Level 1)

(Level 2)

(Level 3)

 

 

 

 

 

Corporate securities

Obligations of states and

     political subdivisions  

           Total

$

373,335


131,511,722

$131,885,057

$

373,335


--

$

373,335

$

--


131,511,722

$

131,511,722

$

--


--

$

--




17





 

 

Fair Value Measurements at Reporting Date Using

 

 

Quoted Prices

 

 

 

 

In Active

Significant

 

 

 

Markets for

Other

Significant

 

 

Identical

Observable

Unobservable

 

December 31,

Assets

Inputs

Inputs

Description

2014

(Level 1)

(Level 2)

(Level 3)

 

 

 

 

 

Corporate securities

Obligations of states and

     political subdivisions  

           Total

$

418,987


132,847,086

$

132,847,073

$

418,987


--

$

418,987

$

--


132,428,086

$

132,428,086

$

--


--

$

--


Note 5 – Equity Method Investment


The Company has one investment accounted for using the equity method of accounting.  On November 1, 2013, the Company invested $10.0 million in Meritage Capital, Centennial Absolute Return Fund, L.P. (the "Fund").  An additional $15.0 million was invested on April 1, 2014.  The carrying value of this investment was $26.2 million and $26.1 million as of March 31, 2015 and December 31, 2014, respectively.  The Company's ownership interest in the Fund was 25.71% and 25.76% at March 31, 2015 and December 31, 2014, respectively.  The Company earned $.1 million and $.3 million from this investment during the three month periods ended March 31, 2015 and 2014, respectively, which was recorded in other revenue on the Company's consolidated statement of income.  With at least 60 days notice, the Company has the ability to redeem its investment in the Fund at the end of any calendar quarter  The Company has no investment commitments to the fund.


Condensed financial statement information of the equity method investment is as follows:


 

March 31, 2015

December 31, 2014

Company's equity method investment

$

26,185,825

$

26,059,579

Partnership assets

$

105,406,807

$

104,677,496

Partnership liabilities

$

2,711,600

$

2,667,002

Partnership net income

$

697,439

$

4,560,544



Note 6 – Commitments and Contingencies:


The Company is, and expects in the future to continue to be, involved in various legal proceedings incidental to its business from time to time.  Management makes provisions in its financial statements for legal, regulatory, and other contingencies when, in the opinion of Management, a loss is probable and reasonably estimable.  At March 31, 2015, no such known proceedings or amounts, individually or in the aggregate, were expected to have a material impact on the Company or its financial condition or results of operations.


Note 7 – Income Taxes


Effective income tax rates were approximately 12% and 10% during the three-month periods ended March 31, 2015 and 2014, respectively.  The Company has elected to be, and is, treated as an S corporation for income tax reporting purposes.  Taxable income or loss of an S corporation is passed through to, and included in the individual tax returns of the shareholders of the Company, rather than being taxed at the corporate level.  Notwithstanding this election, income taxes are reported for, and paid by, the Company's insurance subsidiaries, as they are not allowed by law to be treated as S corporations, as well as for the Company in Louisiana, which does not recognize S corporation status.  The tax rates of the Company’s insurance subsidiaries are below statutory rates due to investments in tax exempt bonds held by the Company’s property insurance subsidiary.  

  

 Note 8 – Credit Agreement






18



Effective September 11, 2009, the Company entered into a credit facility with Wells Fargo Preferred Capital, Inc.  The credit agreement provides for borrowings of up to $100.0 million or 70% of the Company's net finance receivables (as defined in the Credit Agreement), whichever is less, and has a maturity date of September 11, 2017.  Available borrowings under the credit agreement were $100.0 million at March 31, 2015 and December 31, 2014, at an interest rate of 3.75%.  The credit agreement contains covenants customary for financing transactions of this type.  At March 31, 2015, the Company was in compliance with all covenants.  


Note 9 – Related Party Transactions


The Company engages from time to time in transactions with related parties.  Please refer to the disclosure contained in Note 10 “Related Party Transactions” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2014 for additional information on such transactions.


Note 10 – Segment Financial Information


The Company discloses segment information in accordance with FASB ASC 280.  FASB ASC 280 requires companies to determine segments based on how managment makes decisions about allocating resources to segments and measuring their performance.  The Company operates in five operating divisions one reportable business segment.


The Company has five operating divisions which comprise its operations:  Division I through Division V.  Each divisions consists of a number of branch offices that are aggregated based on vice president responsibility and geographic location.  Division I consists of offices located in South Carolina.  Offices in North Georgia comprise Division II, Division III consists of offices in South Georgia.  Division IV represents our Alabama and Tennessee offices, and our offices in Louisiana and Mississippi encompass Division V.  


Accounting policies of each of the divisions are the same as those for the Company as a whole.  Performance is measured based on objectives set at the beginning of each year and include various factors such as division profit, growth in earning assets and delinquency and loan loss management.  All division revenues result from transactions with third parties.  The Company does not allocate income taxes or corporate headquarter expenses to the divisions.


The following table summarizes revenues, profit and assets by each of the Company's divisions.  Also in accordance therewith, a reconciliation to consolidated net income is provided.  


 

Division

Division

Division

Division

Division

 

 

I

II

III

IV

V

Total

 

(in thousands)

Division Revenues:

 

 

 

 

 

 

  3 Months ended 3/31/2015

$

6,889

$

11,839

$

10,723

$

9,852

$

8,798

$

48,101

  3 Months ended 3/31/2014

6,540

11,406

10,893

9,390

8,530

46,759

 

 

 

 

 

 

 

Divison Profit:

 

 

 

 

 

 

  3 Months ended 3/31/2015

$

2,564

$

6,078

$

5,128

$

3,975

$

3,323

$

21,068

  3 Months ended 3/31/2014

2,603

5,897

5,420

3,937

3,456

21,313


Division Assets:

 

 

 

 

 

 

    3/31/2015

$

55,197

$

99,896

$

92,045

$

98,853

$

71,085

$

417,076

  12/31/2014

57,964

106,362

98,627

 

103,094

76,210

442,257

 

 

 

 

 

 

 

 

 

 

3 Months

Ended

3/31/2015

(in Thousands)

3 Months

Ended

3/31/2014

(in Thousands)

 

 

Reconciliation of Profit:

 

 

 

 

 

 

Profit per division

 

$21,068 

$

21,313 

 

 

Corporate earnings not allocated

3,039 

2,627 

 

 

Corporate expenses not allocated

(14,438)

(12,015)

 

 

Income taxes not allocated

(1,113)

(1,140)

 

 

Net income

$

8,556 

$

10,785 

 

 



19




BRANCH OPERATIONS

 

 

Ronald F. Morrow

Vice President

Virginia K. Palmer

Vice President

J. Patrick Smith, III

Vice President

Marcus C. Thomas

Vice President

Michael J. Whitaker

Vice President

Joseph R. Cherry

Area Vice President

John B. Gray

Area Vice President

 

 


REGIONAL OPERATIONS DIRECTORS

 

 

 

 

Sonya Acosta

Loy Davis

Steve Knotts

Marty Miskelly

Michelle Rentz Benton

Carla Eldridge

Judy Landon

Larry Mixson

Bert Brown

Jimmy Fairbanks

Sharon Langford

William Murillo

Ron Byerly

Chad Frederick

Jeff Lee

Mike Olive

Keith Chavis

Shelia Garrett

Tommy Lennon

Hilda Phillips

Rick Childress

Brian Hill

Lynn Lewis

Jennifer Purser

Bryan Cook

David Hoard

Jimmy Mahaffey

Summer Rhodes

Richard Corirossi

Gail Huff

John Massey

Mike Shankles

Jeremy Cranfield

Jerry Hughes

Vicky McCleod

Harriet Welch

Joe Daniel

Janice Hyde

Brian McSwain

 

 

 

 

 


BRANCH OPERATIONS

 

ALABAMA

Adamsville

Bessemer

Enterprise

Huntsville (2)

Opp

Scottsboro

Albertville

Center Point

Fayette

Jasper

Oxford

Selma

Alexander City

Clanton

Florence

Moody

Ozark

Sylacauga

Andalusia

Cullman

Fort Payne

Moulton

Pelham

Troy

Arab

Decatur

Gadsden

Muscle Shoals

Prattville

Tuscaloosa

Athens

Dothan (2)

Hamilton

Opelika

Russellville (2)

Wetumpka

 

 

 

 

 

 

GEORGIA

Adel

Carrollton

Dalton

Greensboro

Madison

Statesboro

Albany

Cartersville

Dawson

Griffin

Manchester

Stockbridge

Alma

Cedartown

Douglas (2)

Hartwell

McDonough

Swainsboro

Americus

Chatsworth

Douglasville

Hawkinsville

Milledgeville

Sylvania

Athens (2)

Clarkesville

Dublin

Hazlehurst

Monroe

Sylvester

Bainbridge

Claxton

East Ellijay

Helena

Montezuma

Thomaston

Barnesville

Clayton

Eastman

Hinesville (2)

Monticello

Thomson

Baxley

Cleveland

Eatonton

Hiram

Moultrie

Tifton

Blairsville

Cochran

Elberton

Hogansville

Nashville

Toccoa

Blakely

Colquitt

Fayetteville

Jackson

Newnan

Valdosta

Blue Ridge

Columbus

Fitzgerald

Jasper

Perry

Vidalia

Bremen

Commerce

Flowery Branch

Jefferson

Pooler

Villa Rica

Brunswick

Conyers

Forsyth

Jesup

Richmond Hill

Warner Robins

Buford

Cordele

Fort Valley

Kennesaw

Rome

Washington

Butler

Cornelia

Ft. Oglethorpe

LaGrange

Royston

Waycross

Cairo

Covington

Gainesville

Lavonia

Sandersville

Waynesboro

Calhoun

Cumming

Garden City

Lawrenceville

Savannah

Winder

Canton

Dahlonega

Georgetown

Macon

 

 




20




BRANCH OPERATIONS

(Continued)

 

LOUISIANA

Abbeville

Denham Springs

Houma

Marksville

New Iberia

Slidell

Alexandria

DeRidder

Jena

Minden

Opelousas

Springhill

Bastrop

Eunice

Lafayette

Monroe

Pineville

Sulphur

Bossier City

Franklin

LaPlace

Morgan City

Prairieville

Thibodaux

Covington

Hammond

Leesville

Natchitoches

Ruston

Winnsboro

Crowley

MISSISSIPPI

Amory

Columbia

Gulfport

Jackson

Newton

Pontotoc

Batesville

Columbus

Hattiesburg

Kosciusko

Olive Branch

Ripley

Bay St. Louis

Corinth

Hazlehurst

Magee

Oxford

Senatobia

Booneville

Forest

Hernando

McComb

Pearl

Starkville

Brookhaven

Greenwood

Houston

Meridian

Philadelphia

Tupelo

Carthage

Grenada

Iuka

New Albany

Picayune

Winona

 

 

 

 

 

 

SOUTH CAROLINA

Aiken

Chester

Greenville

Lexington

North Charleston

Spartanburg

Anderson

Columbia

Greenwood

Manning

North Greenville

Summerville

Batesburg-

   Leesvile

Conway

Greer

Marion

North Myrtle               Beach

Sumter

Beaufort

Dillon

Hartsville

Moncks Corner

Orangeburg

Union

Camden

Easley

Irmo

Myrtle Beach

Rock Hill

Walterboro

Cayce

Florence

Lake City

Newberry

Seneca

Winnsboro

Charleston

Gaffney

Lancaster

North Augusta

Simpsonville

York

Cheraw

Georgetown

Laurens

 

 

 

 

 

 

 

 

 

TENNESSEE

Alcoa

Crossville

Greenville

Knoxville

Madisonville

Sparta

Athens

Dayton

Hixson

LaFollette

Newport

Tullahoma

Bristol

Elizabethton

Johnson City

Lenior City

Sevierville

Winchester

Cleveland

Gallatin

Kingsport

 

 

 



 

 

 

 

 

 

 




21




DIRECTORS

 

 

Ben F. Cheek, IV

Chairman

1st Franklin Financial Corporation

John G. Sample, Jr.

Senior Vice President and

Chief Financial Officer

Atlantic American Corporation

 

 

Ben F. Cheek, III

Vice Chairman

1st Franklin Financial Corporation

C. Dean Scarborough

Realtor

 

 

A. Roger Guimond

Executive Vice President and

Chief Financial Officer

1st Franklin Financial Corporation

Keith D. Watson

President

Bowen & Watson, Inc.

 

 

Jim H. Harris,III

Founder / Co-owner

Unichem Technologies

Founder / Owner / President

Moonrise Distillery

 


 

EXECUTIVE OFFICERS

 

Ben F. Cheek, IV

Chairman

Ben F. Cheek, III

Vice Chairman

 

Virginia C. Herring

President and Chief Executive Officer

 

A. Roger Guimond

Executive Vice President and Chief Financial Officer

 

J. Michael Culpepper

Executive Vice President and Chief Operating Officer

Daniel E. Clevenger, II

Executive Vice President - Compliance

C. Michael Haynie

Executive Vice President - Human Resources

 

Kay S. Lovern

Executive Vice President – Strategic and Organization Development

 

Chip Vercelli

Executive Vice President – General Counsel

 

Lynn E. Cox

Vice President / Corporate Secretary and Treasurer

 

 

LEGAL COUNSEL

 

Jones Day

1420 Peachtree Street, N.E.

Suite 800

Atlanta, Georgia  30309-3053

 

AUDITORS

 

Deloitte & Touche LLP

191 Peachtree Street, N.E.

Atlanta, Georgia  30303




22